Don’t Worry About That Inflation We Didn’t Anticipate, Says BOE

By

Iain Martin

Feb 16, 2010 11:08 pm GMT

Bloomberg

Inflation hits 3.5% and the Bank of England tells everyone: Calm down, nothing to see here, move along. This rise is merely a temporary development, governor Mervyn King says, caused by the end of the temporary VAT cut and increased fuel costs (as though fuel costs somehow don’t really count). Inflation will decline later in the year, the BOE says soothingly. Let’s hope they’re right.

Still it is worth remembering that the central bank didn’t anticipate this level of inflation. What it now says we shouldn’t worry about it not all that long ago didn’t think remotely likely. That means it shouldn’t be surprised if its latest claims about what will happen next are treated with a little skepticism.

It is currently unfashionable to fear high inflation: There is a broad consensus that the conditions simply do not exist for it. We’ll see.

But it is impossible to say with any certainty what the eventual cost will end up being of the extraordinary money-printing experiment that was quantitative easing. Might it have unintended consequences that those in charge didn’t foresee? They certainly didn’t foresee the consequences of running a cheap-money policy for far too long. That was the last big policy consensus, before QE and the consensus that there will not be a rise in the inflation rate.

Two other factors might provide upward pressure later this year and early next. The Tories are warming up for a possible whopping increase in VAT to tackle the deficit. And Union members and their pay negotiating teams will note the latest figures and adjust their demands. Will they be content to sit back quietly and accept the looming steady erosion of living standards? If there is a Conservative government after the election, I doubt it very much.

Perhaps the BOE is right and inflation is not currently a danger. But every time it ticks up we are told that it’s a fluke, or there are special factors, or now that it is purely temporary.

I’m merely suggesting a degree of wariness of predictions from those whose previous predictions haven’t been exactly brilliant.